Lately, as I've spoken with teachers, I've been told, "I want to get things in order for the new year and having a budget would be great. But to be honest, I'm not sure where to begin." They're on the right track, but admittedly, getting started with a budget can be a difficult and frustrating task if you've never created one, or have tried to budget in the past and not been too successful. So today, I wanted to share some insight into one of the ways I help clients create budgets and provide you with a free template to get started.
This approach is called The 3-Step Budget and it simplifies the process of getting started and is designed to make it easy to stick with once you've put it in place.
Get your copy of The 3-Step Budget template here.
Step 1: Figure Out Your 'Net' Pay
Before jumping into anything on spending, saving, categories, etc., you first need to know how much money you have to work with on a monthly basis. There are few things in life that are truly guaranteed, but one of them is paying taxes. And as we all learned looking at the first paystub from our first job, they're pulled right out from the beginning. Along with those taxes, there are other important items deducted from our pay including insurance and pre-tax savings if you contribute to certain retirement or healthcare accounts.
So to figure out net pay, you'll need to take your gross pay and then subtract out all of the deductions. The good news is, this is usually the easiest step, because when you get your hands on your paystub, it's usually all right there, already done for you. On the template, I recommend listing out all of the deductions that get you from gross pay to your net pay because as you go through the rest of the process, you may need to adjust your deductions based on if you decide to save more or less in your retirement account or change your insurance coverage.
Step 2: Pay Yourself First
Once you know how much money is going to make it into your account, it's important to decide how much money you want to save toward your goals, before thinking about spending. This is called paying yourself first and is a way to get you in the habit of building your savings for your goals, rather than that being just wishful thinking. I strongly recommend everyone have an emergency fund so that in a crunch you don't have to go into debt to cover an unexpected expense. Also, proactively saving for retirement, college, and vacations is important to building a successful financial future. (How much should you be saving for retirement?) On the template, use this step to prioritize savings that are important to you. Be realistic here, you still need to have money to live on.
Step 3: Cover your essential expenses & loan payments
Once you've paid yourself, it's now time to make sure all the important things are covered, like your mortgage, rent, utilities, groceries, and loan payments. We call these your "non-discretionary" expenses because they have to be paid each month or else you'll find yourself in some trouble. That's why when budgeting, it's important to cover these expenses prior to thinking about spending on clothes, eating out, technology, etc.
Once you've covered your your essential expenses and loan payments, you'll be left with your "Lifestyle Income". This is the money you can do whatever you want with and use to enjoy life. The great thing about Lifestyle Income is that as long as you don't spend more than that amount each month, you should stay right on track and won't have to worry about categorizing each dollar you spend on different things. On the template, hopefully, it's a positive number. If it's negative, you'll need to go back and make some changes because it's a sign you lifestyle might be beyond your means or you've allocated too much to savings. You may need to go back to different areas of the template and adjust back and forth to make things work the way you'd like.
Well there it is, The 3-Step Budget you can use to easily set up your budget for the rest of 2018. As you work on your budget, it'll be important to answer the question, "how much should I be saving or spending in certain areas?" There are some general guidelines in most of the areas but the answer really comes down to each individual's situation. If you'd like help on figuring this out for your budget or have questions, don't hesitate to reach out and we'll be happy to help set you up for success.
Mychal Eagleson, CFP®, ChSNC®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers. He frequently writes and speaks on teacher finance topics and is passionate about helping teachers plan for the future so they can utilize their finances to live exceptional lives. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles and learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com